Pillar: Financial Markets

Ethiopia: Long way to go before the country can build securities exchange from scratch

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Earlier this year, Ethiopia launched Ethiopia Investment Holdings (EIH), a new sovereign wealth fund, in a bid to spur foreign direct investment under a wider programme of privatisation and financial liberalisation. EIH has since announced its intention to establish the Ethiopian Securities Exchange (ESX).

Working with the finance ministry and the specialist markets development agency FSD Africa, EIH expects the exchange to launch in two years, with 50 companies initially listed.

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Progress towards Ethiopia’s Stock Exchange

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At least 50 companies are expected to list when Ethiopia’s stock exchange launches. The country’s new $38bn sovereign wealth fund Ethiopia Investment Holdings (EIH) is working with the Ministry of Finance and Nairobi-based FSD Africa to set up the Ethiopian Securities Exchange (ESX) with an aim to get it operating by end 2023 or in the first half of 2024.

Ethiopia Investment Holdings has set up a project team with FSD Africa, backed by British Government development aid, and in September was inviting consultants to bid for a fund-raising drive to raise capital for the new bourse. The project team is to develop the ESX business plan and its structures, as well as outlining the market segments. It is also to lead developing the ESX trading rules, policies and procedures, the ESX trading and operating systems, and other ICT infrastructure. It will set the ESX into operations and launch it.

According to this news report on Capital Ethiopia, FSD Africa is funding technical support, legal advice and costs to get the stock exchange operational. The Ethiopian Securities Exchange will be a key step forward in capital markets development in Ethiopia as we highlighted in a previous editorial.

The Capital Markets Proclamation (No. 1248/2021) says the exchange will be established as a Share Company (public company in Ethiopian law) by Government in partnership with the private sector, including foreign investors. Between 25% and 55% of the ownership of the ESX will be for corporations, capital market intermediaries and operators of international securities exchanges, while Government will not own more than 25%. It will be a for-profit entity.

According to the FSDA, “At least 50 companies, including banks and insurance companies, are expected to list at the launch of the exchange. The exchange is designed to provide a fundraising platform for small and medium-size enterprises, which are the backbone of the Ethiopian economy. The exchange will also offer a platform for the privatisation of Ethiopia’s state-owned enterprises.

“In the past few years, the Government has implemented several reforms to open the economy and the launch of a securities exchange will be a catalyst for attracting new investment from the private sector.” The exchange will be a platform for the privatization of Ethiopia’s state-owned enterprises and will help Ethiopian businesses, including small and medium-size enterprises to raise capital.

The Ministry, EIH and FSDA signed a cooperation agreement to launch the bourse on 18 May 2022. Finance Minister Ahmed Shide said the cooperation agreement “… is a first concrete step towards realizing our vision.”

Mark Napier CEO of FSDA, added: “Our assistance… will leverage FSD Africa’s vast expertise and experience in developing capital markets infrastructure across Africa. This support signals our long-term commitment to a thriving capital market that is deep, liquid, and efficient.”

The next day a local agency, FSD Ethiopia, was launched to maintain the momentum. The timetable has become more realistic since 2019, when the exchange was flagged for 2020.

Meanwhile, work continues to build the Capital Market Authority regulator. In November 2021, Meles Minale, a senior macroeconomic advisor at the National Bank of Ethiopia (central bank) was appointed to chair a team of 14 experts to explore the establishment of the Authority. They report to Yinager Dessie, Governor of the NBE. According to this report by United Nations Development Programme, in June 2022, the NBE’s Capital Market Project Implementation Team (CMPIT) outlined a 10-year implementation plan and a roadmap with 4 pillars: market development, infrastructure development, capacity development and policy reviews.

Prime Minister Abiy Ahmed will appoint a director and a deputy director for the Authority, which will be a federal agency accountable to Parliament. Its role includes safeguarding investors and overseeing the integrity of the capital market and supervising securities brokers, investment advisers, collective investment scheme operators, investment bankers and securities dealers.

EIH is a key shareholder in the ESX and is also likely to boost the exchange with a pipeline of listings, at least of minority stakes, in its $38 bn business portfolio. According to a EIH statement: “ESX will democratize corporate ownership of the nation’s largest and most influential companies, empowering Ethiopians with a direct stake in their country’s economic infrastructure.”

Observers believe it could still be two years before the ESX opens its doors for trading. It is expected to trade equities, derivatives, financial and debt securities, and FX (currency exchange) contracts. The country lacks stockbrokers, investment advisors, fund managers, custodians and many others.

A team from Ethiopia, including Ethiopia Investment Holdings CEO Mamo Esmelealem Mihretu and FSD Ethiopia CEO Ermias Eshetu, came to AFSIC 2022 conference in London in October to meet potential investors and discuss progress on the stock exchange.

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Africa seeks US$170 bln for Resilient infrastructure

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AFRICA needs to mobilise a staggering US$170 billion annually in long term financing to develop infrastructure key sectors, agriculture included to accelerate growth dwarfed by the COVID 19, conflicts and climate change.

Faced with an overarching ‘debt overhang’ buffeting many of the continent’s 54-member states, the African Development Bank is dangling two options; float Green Bonds on security markets or entice cooperating partners to secure finance and close the continent’s current annual US$108 billion infrastructure financing deficit to close the gap.

The AfDB in  noting Africa’s infrastructure predicament amid the crisis that linger over the continent with lust to integrate and industrialise and make it competitive in intra and international trade practices has two immediate options to use capital market instruments or  draw donors to the table.

Africa’s predicament has further been heighted by geopolitical influence and‘ a debt overhang’ that hinder the attainment of the much-espoused sustainable development in all growth sectors including agriculture, SMEs, among others, hence the need to stimulate financing options.

Officiating at the three-day- 2022 African Long Term Finance Workshop dubbed: “Financing Africa Sustainable Development in Times of Global Headwinds” in Lusaka, AfDB’s country Manager-Zambia, Raubil Olaniyi Durowoju believes the funds can be mobilized to create ‘resilient infrastructure’ and enhance sustainable growth in key sectors in its 37-member states.

In 2019, the Pan African financial institution had in  collaboration with Germany Cooperation (GIZ) GmbH, Financial Sector Deepening Africa (FSD) Africa and the Making Finance Work for Africa (MFW4A) sought to improve intermediation of LTF on the continent by strengthening knowledge generation and dissemination through the creation of a database and scored board to act as comparative indicators of the level of development for the fund.

The diagnostic efforts so far undertaken in three countries, Cote d’Ivoire, Ghana and Ethiopia  as part of the market data intelligence, has however not been sustained for various administrative reasons although there is still zeal by the AfDB to sustain the research to determine the countries’ capabilities.

However,  the willingness of Central Bank across the member states to assist in data collection have raised hope to supplement AfDB’s efforts to attain the objectives of the LTF initiative and help capture an accurate hope to improve data collection picture on the continent, raising a ray of hope for the attainment of LTF.

Mr. Durowoju calls for the unlocking of the potential endowed in 37-member states to access LTF through the creation of credible databases through enhanced policy reform while striving to make the database creation as LTF ‘one -stop-shop as priority for the realization of the long-cherished dream.

“We the AfDB hope to improve data collection on the continent and strengthen the quality of available data, ultimately, we hope to encourage more dialogue between policymakers, governments and financial stakeholders to create a synergy that will provide solutions to our financing deficit and support African financial sectors and economies,”

And Zambia’s Central Bank Governor, Denny Kalyalya expressed the country’s unwavering desire to complement the data collection as sought by the AfDB and that the success of the LTF was vital for Africa’s quest to raise resources for infrastructure development to become resistant to climate crisis.

Dr. Kalyalya acknowledges the theme adopted at the Lusaka-three-day conference, propping a drive for LTF that has been endorsed  by the Breton Woods institution-IMF for Africa to raise a staggering US$30-50 billion in additional funds per year for climate change adaptation through among other instruments, the Green Bonds, an alternative to debt accruals as it seeks to invest in infrastructure.

He acknowledges the risks associated with the climate change effects which has prompted policy makers to pay attention to the devastations and are actively taking steps to counter the effects.

The lingering effects of COVID 19 pandemic on world economies further serves to emphasis the unwavering need to raise LTF.

The heightening geopolitical unrest as evidenced in the Russia-Ukraine war and recent inflationary pressures have heightened economic uncertainty globally, de facto, limiting fiscal space on the continent.

The Lusaka-based Bank of Zambia realizes the need to partner in the data collection and compilation and foster the generation and disbursement of the would-be funds for the intended purposes, though regrets the slow pace at which the diagnostic process was undertaken-covering a paltry three countries, hopeful the exercise would be revisited and expedited to allow Africa raise LTF.

“The Bank of Zambia is pleased to take part in the significant project and I can confirm that the BOZ has completed all necessary steps to submit the requested data for 2022,” he said in a speech read on his behalf by Ms. Gladys Mposha, the director, Bank supervision

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UK govt to support Nigeria’s financial sector, innovation

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The United Kingdom has reiterated its commitment to supporting Nigeria’s financial sector, particularly, the capital market in being more innovative, sustainable and resilient to emerging climate change challenges.

British Deputy High Commissioner to Nigeria, Ben Llewellyn-Jones, stated this at the unveiling of the Revised Capital Market Master Plan (RCMMP) in Lagos at the weekend.

Represented by the Head of Economic Development, Ms. Sally Woolhouse, she said the UK is poised to continue to supporting the Securities and Exchange Commission (SEC) to deepen Nigeria’s capital markets.

According to her, “The UK government which has been a long-staying ally of the Nigerian government, is committed to supporting the country’s financial sector, particularly, the capital market in being more innovative, sustainable and resilient even as we all face emerging challenges such as climate change.

“As I have earlier mentioned, our offer covers technical support including green the capital market – Financial Sector Deepening (FSD) Africa is doing an awesome job in partnering with you to drive this mission; also, we can explore the potential strategic engagement with UK financial market institutions such as the London Stock Exchange – through which SEC could gain insight into emerging trends.

“Once again, congratulations to the Nigerian government and well done to the SEC for pulling off a commendable feat. We look forward to working more collaboratively with every partner in achieving a sustainable and resilient financial sector in Nigeria”.

In his remarks on the outcome of the Capital Market Committee Meeting, the Director General of the SEC, Lamido Yuguda, said the meeting emphasised the increasing importance of fintech, sustainable finance, financial inclusion and non-interest finance.

Yuguda said members of the CMC agreed to collectively work towards the enactment of the Investments and Securities Bill 2022, which will enhance the performance of the Nigerian capital market and align it with global best practices.

The bill seeks to improve the legal and regulatory framework that will accommodate the dynamics of the market.

The DG reiterated the commitment of management of the commission to ensure full implementation of the initiatives of the RCMMP, which would form the basis of the policy direction of the commission for the coming years

Representative of FSD Africa, Victor Nkiri said developing a capital market master plan provides a clear roadmap for the development of the capital markets holistically and realistically whilst setting clear targets and action points.

According to him, this provides positive market signalling to all financial sector players such as policymakers, potential domestic and international investors, peer regulators and ministries of finance as it provides direction for the capital market development of any country.

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GSE tightens rules on green bonds

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The Ghana Stock Exchange (GSE), in collaboration with the Securities and Exchange Commission (SEC), has launched new rules to guide the listing and trading of green and sustainable bonds on the market.

Dubbed the Green and Sustainable Bond Rules, the launch of the new guidelines formed part of activities to mark the 32nd anniversary of the local bourse which is being celebrated on the theme: “Investing into a green and sustainable future.”

Green bonds are bonds that support new or existing projects to generate climate or other environmental benefits that conform to green guidelines and standards.

Sustainable bonds on the other hand support new or existing projects that generate both environmental and social benefits that conform to the sustainability guidelines.

The first green bond was issued in 2007 by the European Investment Bank under the label Climate Awareness Bond. Due to the role the finance sector plays in allocating capital efficiently, it remains a key channel for economies all over the world to make a real impact.

As such, the best way to combat climate change while still making profit is through the financial market.

In his keynote address at the launch, the Regional Industry Director for Financial Institutions Group, Africa of the International Finance Corporation (IFC), Aliou Maiga, commended the GSE for showing leadership in green and sustainability finance.

He said climate financing was not only a development imperative but also a significant market opportunity.

“IFC is committed to working with Ghana’s stakeholders to facilitate investments that reduce greenhouse gas emissions and support climate change adaptation,” he stated.

Well timed

Also at the launch, the Director General of the Securities and Exchange Commission, Rev. Daniel Ogbarmey Tetteh, said investing in green and sustainable future was both well timed and opportune.

He said sustainability was a broader topic that hinged on social, human, economic and environmental pillars, none of which could be ignored.

“It is the most pressing challenge of our time for many business leaders. However, there is evidence of a correlation between the long-term success of a business and sustainability.

“Investors across the world are demanding opportunities to invest in companies or investments with strong Environmental, Social and Governance (ESG) markets,” he stated.

For his part, the outgoing Managing Director of GSE, Ekow Afedzie, said sustainable bonds had gained traction globally due to the enormous benefits they brought to the environment and society at large.

He said the GSE had been very committed to sustainability initiatives over the past years, culminating in its recent admission to the UN Sustainable Exchanges in July.

He noted that the launch of ESG Disclosure Manual Guidelines in November this year was also another testament to its commitment to this sustainability journey.

“The launching of green and sustainable bond rules today is another milestone on our sustainability journey. Listed companies in Ghana now can tap into these fast-growing bond investment products to raise capital that can be used in supporting ESG initiatives,” he noted.

Deep liquid markets

In a goodwill message, the Senior Financial Markets Specialist at Financial Sector Deepening, Africa (FSD), Victor Nkiiri, said “at FSD Africa, we see the development of capital markets to an end to increase income and job creation, access to basic services and building of sustainable futures”.

He said deep liquid markets were fundamental to economic growth because they helped channel longer-term domestic savings of an economy to the most productive use.

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FSD Africa & CDG Capital support Africa’s first corporate clean mobility green bond worth 1 billion

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Africa’s first corporate clean mobility bond has today been launched by Morocco’s national railway operator (ONCF). FSD Africa provided technical assistance for the green certification process of this bond.

With this issuance, ONCF is targeting to raise approximately 1 billion dirhams ($95m) to support the Al Boraq project, which has led to considerable gains for the community in terms of connectivity, travel time and frequency, while reducing greenhouse gas emissions.

This high-speed line (Ligne à Grande Vitesse – LGV) project is part of a master plan to connect Tangier to Marrakech by 2030, advancing economic development by providing faster inter-urban passenger and freight lines with reduced carbon emissions. Through the LGV Journey time between Tangier and Kenitra has been reduced by 2 hours and 25 minutes and will result in a reduction of over 2.9 million tonnes of carbon equivalent over a 30-year timeframe.

Indeed, reinforcing the ecological qualities intrinsic to the railway mode, as a vector of sustainable mobility, ONCF is fully committed to a socio-environmental policy, placing sustainable mobility at the heart of its corporate strategy and its development model. From January 1, 2022, ONCF has taken a bold step in its energy transition by running all of its Al Boraq trains on clean wind energy. ONCF is carrying out its green transformation in a gradual way, by increasing 25% of its overall energy consumption to green energy, to reach 50% in 2023 before fully transitioning into green energy by 2030.

According to the International Energy Agency (IEA), rail is among the most efficient and lowest emitting modes of transport: trains represent only 0.3% of global total emissions compared to 2% for aviation. Whilst transport represents a large share of green bond issuances worldwide (20% of all green bonds issued globally), in Africa, it is still greatly underrepresented (less than 1%) of total issuances.

This project is an important example of how the utilisation of a capital market instrument – a Green Bond, can address infrastructure challenges and provide a climate-friendly solution. FSD Africa considers this project as one of the approaches to effect the change and to show other potential issuers and investors the feasibility of the green bond labeling process.

Green bonds are one of the most readily accessible and economical options to help raise large amounts of capital to meet environmental targets in Africa. The potential long-term expected market system changes of this project will contribute to a more sustainable future characterised by the creation of economic resilience via a more efficient and low-carbon transport of passengers and goods.

Commenting on the project, FSD Africa CEO, Mark Napier, said: “Climate Finance is an important focus area for FSD Africa. This project presents an opportunity for FSD Africa to support the issuance of Africa’s first corporate clean mobility bond. The issuance of green bonds as a tool for unlocking significant capital for sustainability-related investment has been gaining traction in Africa in recent years.  We look forward to supporting further green bond issuances“.

Simon Martin, British Ambassador in Morocco said: “Morocco’s capacity for financial innovation is powering a new era of post-covid economic growth that, with the right ingredients, can set the Kingdom on a truly sustainable development pathway. I’m incredibly proud that, through the work of organisations like FSD Africa and its partners, the British Government is helping support Morocco’s journey to establish low carbon transport infrastructure through its national railway operator ONCF issuing Africa’s first corporate clean mobility bond”

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New Report – Innovative Finance Is Essential To Tackle Barriers To Investment In Africa’s Climate Finance Needs

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At An Average Investment Of USD 250 Billion Annually From 2020 To 2030

The African continent presents a massive investment opportunity for investors to advance the deployment of climate solutions in the coming decade according to a new report Climate Finance Innovation for Africa. However, this will require innovation in financing structures and the strategic deployment of public capital to ‘crowd-in’ private investment at levels not yet seen.

Current levels of climate finance in Africa fall far short of needs. Africa’s USD 2.5 trillion of climate finance needed between 2020 and 2030 requires, on average, USD 250 billion each year. Total annual climate finance flows in Africa for 2020, domestic and international, were only USD 30 billion (CPI forthcoming), about 12% of the amount needed.

Barriers related to shallow financial market depth, governance, project-specific characteristics, and enabling skills and infrastructure have stifled private investment in African climate solutions to date.

To overcome these challenges will require innovation in financing structures. But there is no one-size fits all. Public and private investors must tailor their financial instruments and strategies depending on the acute or chronic nature of the barriers identified.

Recommended actions for increasing deployment of innovative finance include:

  • Identify and understand barriers constraining finance by sector and geography. Private investors must have the data to assess the risks affecting each investment decision based on its geographic and sectoral context. Building on their role as a catalyst for change, public investors should then deploy capital in a targeted way to address the specific barriers constricting private investment.
  • Match instruments with barriers. Public and private investors must tailor their financial instruments and strategies depending on the acute or chronic- nature of the barriers identified. The framework developed in this CPI study can serve as a toolbox for investors to access when reviewing investment opportunities in climate solutions.
  • Match instruments with project and technology lifecycles. As climate investments are typically long-term opportunities, investors must look to deploy different financial instruments and strategies in direct response to lifecycle-dependent considerations.
  • Enhance engagement and co-financing with local stakeholders. International private and public investors must work in collaboration with local stakeholders. This can help build capacity among local investors and inform targeted action by governments to improve investment performance.
  • Support innovation by establishing conducive policy and regulatory frameworks. Governance barriers remain one of the key impediments to sourcing climate finance in Africa. Most importantly, policymakers and regulators can foster climate finance innovation by adopting policy frameworks and long-term roadmaps.

This work provides a framework for how these instruments and strategies can be efficiently deployed to overcome barriers to finance and capitalise climate solutions in Africa. Real-world examples include:

  • TerraFund for AFR 100 has deployed a standardized process to deploy early-stage catalytic finance and technical assistance to spur the growth of grassroots innovators operating in the challenging land restoration sub-sector. It has mobilized USD 20 million in its initial round of investment, doubling the fundraising target it set out to raise over three years in 2020.
  • The Sub-National Climate Finance Initiative’s use of blended private equity and technical assistance to overcome the project and governance barriers facing investment in mid-sized climate infrastructure projects. To date, it has secured USD 150 million in funding for its blended equity fund.
  • Revego Africa Energy’s strategy of aggregating a diversified portfolio of operating renewable energy assets into Africa’s first YieldCo to attract investment from key/blue chip institutional investors. With support from a public-private partnership between Macquarie and the UK Government, Revego has secured institutional capital from one of the largest pension funds in South Africa.

This brief provides an overview of financial and non-financial solutions to address sector specific barriers. It provides six groups of practical instruments: non-tradable finance instruments; capital market instruments; result-based finance instruments; risk mitigation instruments; structured finance mechanisms and non-financial tools. Each of these tools has the potential to address one or more of the barriers currently hindering climate investments in Africa.

This paper is part of The State of Climate Finance in Africa series from Climate Policy Initiative, The Children’s Investment Fund Foundation, and FSD Africa. The Landscape of Climate Finance in Africa report will be published later this summer.

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As COP27 Looms, Africa Receives a 10th of Climate Financing It Needs

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As the international climate community prepares to descend on Sharm el-Sheikh in Egypt, new analysis shows just how far off their host continent is in terms of attracting the finance it needs to adapt to catastrophic global warming, build renewable energy plants and enhance its carbon-absorbing ecosystems.

At $30 billion, annual climate finance flows in Africa are just 11% of the $277 billion needed, according to research published Wednesday by the Climate Policy Initiative, a US-based nonprofit. The research was commissioned by FSD Africa, an organization funded by the UK government, the Children’s Investment Fund Foundation, a charity set up by billionaire hedge fund activist Christopher Hohn, and UK Aid. It’s the first to map climate finance flows in Africa by region, sector and source, and captures available data for 2019 and 2020.

Top of the agenda at the November UN climate summit in Egypt, known as COP27, will be demands from developing nations for more funding from rich countries to adapt to global warming and a financing mechanism to help them cope with natural disasters and extreme weather events. In 2009, developed countries committed to $100 billion of assistance for poorer nations every year. They have fallen significantly short of that target.

Africa accounts for a tiny fraction of the world’s carbon emissions but its nations will be among the hardest hit by global warming, already manifested globally in disasters ranging from heat waves in Europe to droughts in the Horn of Africa and floods in Pakistan.

“A report such as this allows us to measure whether the commitments of developed countries to provide finance to developing countries, is indeed being delivered,” said Valli Moosa, deputy chairman and effective head of South Africa’s Presidential Climate Change Coordinating Commission, in a statement.

Private sector finance in particular remains too low, the Climate Policy Initiative said in the report. Companies and commercial financial institutions contributed just 14% of total climate finance received in Africa, much lower than in other developing regions.

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Existing flows are highly concentrated, with 10 of the 54 countries on the continent accounting for more than half of Africa’s climate finance. These include Egypt, Morocco, Nigeria, Kenya, Ethiopia and South Africa. The Southern African region bears the largest financing gap in absolute terms, attributed by the researchers to the $107 billion annual needs of South Africa alone, combined with one of the lowest regional levels of climate investment. As a percentage of gross domestic product, countries in Central and East Africa face the largest investment gaps.

Investment Opportunities

South Africa, the continent’s most industrialized nation, is transitioning from reliance on coal for more than 80% of its electricity to renewable energy, meaning that billions of dollars will need to be spent on new power plants and an expanded electricity grid.

“Public and private actors must act with scale and speed to help bring Africa’s climate goals to fruition,” said Barbara Buchner, global managing director of the Climate Policy Initiative. “Africa offers a wealth of climate-related investment opportunities” and “the social, economic, and environmental benefits which could be realized are even greater,” she said.

Those investment opportunities are spread across a number of sectors, including clean energy plants and agribusiness. Annual investment in renewable power stands at just 7% of the $133 billion that the International Energy Agency estimates African countries need to meet their 2030 energy and climate goals, according to the research. Agriculture and forestry investments are also falling short of financing needs.

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Kenya a major recipient of green funding in Africa

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Kenya is among the developing countries that accounted for 50 per cent of total tracked private finance flowing into Africa, according to a new report by Climate Policy Initiative.

With private climate financing valued at close to 4.2 billion dollars (Sh506.5 billion) flowing into the continent in 2022, it means that Kenya and other developing countries received green financing amounting to Sh253.3 billion.

The report has, however, indicated that Africa needs nine times more climate financing annually than the 30 billion dollars (Sh3.6 trillion) inflows it received in 2020 to implement plans to cut emissions and adapt to the impacts of climate change.

https://youtube.com/watch?v=WpY2b7Q7RN4

The findings show that the private sector’s contribution towards climate-related financing in Africa was too low, at only 14 per cent (4.2 billion dollars) of total climate finance in Africa.

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